Topic 8 – Market Volatility and Your Retirement

Our second hypothetical example of sequence risk is going to be including a big brother Bill and little sister Jill, let’s see how sequence risk affects their decision as to how much income they should take out in their early years of retirement.

In this Federal example, our big brother bill is 60 years old. He decides to retire in 1996 and he has a total retirement asset pool of $1 million. His investments are invested in a broad market index. Let’s call it the S and P 500 many people are familiar with that benchmark index and bill withdraws his income out at 4% per year. But remember inflation, Bill’s gonna think about inflation, and he’s going to say that I want to step my income up each year, 3% to adjust for inflation. His little sister, Jill also decides to retire at age 60. She has a million dollars. Also her investments are the same as her big brother. Billy gave her some good financial advice and she decided to buy into a broad market index fund also. And she also factors her withdrawals for inflation at 3%. But I want to go back up to one important difference between big brother, bill and little sister, Jill big brother, bill retired in 1996, little sister, Jill.

However had to wait three more years before she could retire and retired in 1999. In this slide, we see how market volatility can impact retirement positively big brother, bill retires in 1996. And you see his one year index return amount in the first year of 20 point 26 positive. He follows that up with an additional three more years of positive numbers, and then he experiences bubble that many of you may remember from 2000, 2001 in 2002, and he loses approximately 50% of his investment portfolio. But do you see how his year end account value on the far right has grown during those first four years? He had a great sequence of returns in his first four years before experiencing a negative in 2017. His year end value in his account was 1,894,000. He had an average one year index return of 8.9%. And his total withdrawals were 1 million, 221,470.

I, his total change in account value was a positive 89.45%. Bill has had a sequence of returns and has very little worry about running out of money and retirement. Going back to little sister Jill though, who retired in 1999 only experienced one of the positive years that our big brother bill did. She got a positive 19.5, 3% in the first year. However, it was followed up by bubble where 50% of her portfolio was lost. Over those three years. She also had a loss in 2008 of 38%. And her sequence was not as good as big brother bill, because what we see at the end of her time period in 2017 as a comparison was that she only had $257,000 left in retirement. Her one year average was 6.05%, which wouldn’t be bad except for the fact that she only has a little bit of money left. Now at a relatively young age in retirement, her total withdrawals were slightly over a million dollars and her total change in account value though was a negative 74.29% all because of a negative sequence of returns. So I told you, sequence of returns, risk can affect you positively or negatively.

Now that we’ve seen the effects of sequence of returns risk on income planning for big brother Bill and little sister Jill, I need to encourage you to complete all the topics to finish module number two, complete and pass your module number two quiz, and then stay tuned in module three to learn a solution for little sister Jill’s issue of poor sequence of returns risk early in retirement. Little sister Jill can apply income allocation theories to her investment portfolio earmarked to provide retirement income before she retires, and then teach us how to create an opportunity for improvement of increased income potential, and at the same time, reduce the risk of running out of money in retirement. If you have any questions on any of the information in this module, please click on the “ask a question” button or fill out the form below.